Thursday, May 2, 2013

Government Spending Vital to Economic Vitality, Here's the Proof...

Even before the federal spending crunch began to pinch on March 1, Chi-Yeh Han Boone was already feeling the impact of the budget squeeze known as the sequester.

The co-owner and CEO of Fort Worth Gasket & Supply - which sells parts to the military - said the loss of supply contracts forced her to lay off contract workers filling orders in the company warehouse.

"If you don't have the cash flow, with a reduction of 25 percent of revenues you have to cut staff," Boone said.

More job cuts are on the way as the river of government spending flowing through the U.S. economy continues to slow. The $85 billion federal spending squeeze - part of a doomsday budget package originally approved last summer to force a more rational spending plan - has now lopped more than a full percentage point from gross domestic product over the past six months and eliminated tens of thousands of federal jobs.

The hit to federal payrolls is expected to show up Friday in the latest monthly job numbers for April. Most economists are expecting the report to show a net gain of 145,000 jobs, according to the economists polled by Reuters.

The pace of layoffs is expected to pick up speed this summer. The Congressional Budget Office estimates that for the full year, federal spending cuts will reduce overall employment by about 750,000 jobs. Most agencies have just gotten started.

Private economists say that budget office estimate is probably on the high side because government managers will be looking to generate whatever savings they can by temporarily furloughing workers and cutting back hours - before resorting to outright layoffs - in order to hit their 5.1 percent sequester savings mandates.

"The extent to which it's done through hiring or through furloughs is pretty hard to get handle on," said Chad Stone, chief economist at the Center on Budget and Policy Priorities. "Either way, there certainly will be less hiring than would otherwise take place."

That means Uncle Sam's belt-tightening will weigh on the job market through the rest of the government fiscal year, which ends Oct. 1.

Though the cuts officially took effect March 1, the impact is expected to build through the summer as federal agencies work to meet the Oct. 1 deadline.

"The way the sequester is designed, it's gradual in its nature," said Gregory Daco, an economist at IHS Global Insight. "You cut budget authority, but that doesn't mean you immediately cut spending. So the actual cuts to outlays take time to materialize."

Those cuts will also hit other spending programs that will bring indirect pressure on non-government hiring, economists say. Cuts to federally funded, state-managed unemployment insurance programs will be concentrated in the summer months. Those cuts will hit hardest in later in the summer in states that delay implementing them.